Top retail advisors are blazing a path toward a world in which clients with bigger accounts get all the attention. And advisors fighting over that business must provide a broad selection of products and services, and be prepared to live off their fees rather than their trades.

Looking at the top advisors in the industry sectors Investment Executive surveyed this year as part of our Advisors’ Report Card series — investment dealers, mutual fund dealers, banks and credit unions, and insurance — there are stark differences between those at the top of their respective businesses, as measured by gross revenue, and the rest of the field. Our research reveals that, while the various industry sectors are still quite distinct from one another in many ways, data on the top advisors from each sector reveal trends that are common to all facets of the business.

This year, in the Advisors’ Report Card, IE turned to advisors’ annual gross revenue rather than assets under management to take advisors’ measure. While AUM or book size reflect the sale of mutual funds and securities, they are not indicative of insurance sales.
And as the channels blend — with an increasing portion of brokers’ product mix coming from insurance, and insurance advisors’ mutual funds sales a growing but still small part of their overall revenue — gross revenue seemed a more accurate gauge.

To look at the top advisors, we split our database of 1,430 advisors at the $500,000 mark in gross revenue. Those above, 16% of all advisors surveyed, are the top advisors. Those having less than $500,000 in gross revenue constitute IE’s average advisor. Whatever way you slice it, the top advisors hold a wide, and growing, advantage over the rest of the field.

For example, top advisors have an edge in experience. The average top advisor reports that he or she has been in the financial services industry for 17 years, compared with 14 years for the bulk of the industry. And, the top advisor has been at his or her current firm longer. Top advisors have almost 10 years under their belt at their current firm, vs less than eight years for the rest of the field.

These are extraordinarily long tenures, both in terms of time in the industry and time with the same firm. This is particularly notable for the top advisors, who are also younger — averaging 44 years of age, compared with 46 years for the rest of the field. This suggests that top advisors have been in the industry for the vast majority of their working lives, starting around the time of the last major crash in 1987, and that they got into the financial industry relatively early in their careers. By contrast, advisors with annual revenue of less than $500,000 seemed to get a later start in the industry, and have switched firms more recently.

If the average top advisor joined his or her firm while the last great bull market was still roaring and stuck with it through the bursting of the market bubble, it may be a case of loyalty to the firm — or the fact that advisors are increasingly tied to their firms through the proliferation of proprietary products. (Top advisors, particularly, are heavier users of fee-based products.) Conversely, it may be that firms are willing to do much more to keep top advisors happy, on the theory that it’s cheaper to hang on to an existing top producer than it is to recruit one from a rival.

One reason why firms may be clinging to their top advisors more tightly than in the past is that the top advisors are certainly doing a better job of bringing in the sort of accounts that firms are increasingly eager to see — big ones. While the lower end of the field reports 57% of their accounts fall into the less than $250,000 range, a third of the top advisors’ books are in this category.

Top advisors hold a distinct edge over the rest of the field at every other account size, too. Notably, they have almost double the proportion of their books in accounts that are between $500,000 and $1 million — 23% for top advisors vs 12% for the rest of the industry. That advantage only increases in the bigger accounts, with 16% of their accounts coming in at more than $1 million, vs 5% for the average advisors. (Note that these numbers never add precisely to 100% because of rounding, and the fact they are based on estimates that sometimes don’t add to 100%, either.)

@page_break@With the composition of the accounts of top advisors looking so different from their rivals’, it’s hardly surprising that the asset allocation of those accounts is much different, too.

Top advisors rely far less on mutual funds than the rest of the industry. For example, about 16% of the top advisors’ assets are in mutual funds, vs about 27% for the rest of the industry.

The top advisors hold much more in direct securities, with more than 23% of their books in equities, vs just 7% for the rest of the industry. (This also indicates that the rich end of the food chain are the investment advisors.) Top advisors have about 15% in bonds, vs 5% for the rest of the field. And, top advisors have a much heavier allocation to income trusts directly, 9% vs just 2% for the smaller reps.

That’s not to say that top advisors are eschewing managed products altogether. But the top advisors seem to prefer third-party managed products, allocating a greater portion to those than to products managed in-house.

In part, this use of outside managed products may reflect the higher account minimums that some of these products have, so it’s only natural that advisors with larger accounts are more likely to make use of them. It may also reflect the fact that advisors like the open-architecture approach, which doesn’t simply lock clients into house wrap accounts.

And the increasing use of managed products (both proprietary and third-party products) is reflected in the revenue streams upon which advisors rely. Transactions are still the single largest source of revenue for both top advisors and the rest of the field, but they are much less significant for top advisors — representing an estimated 58% of their annual revenue, vs 63% for the other advisors.

The difference between top advisors and the rest in terms of transaction revenue is made up in fee-based compensation. Fee- or asset-based remuneration accounts for 33% of top advisors’ annual revenue. This compares with about 15% for the rest of the field.

Deal-based compensation represents another 8% of top advisors’ annual revenue, vs just 2% for most advisors. Salary, on the other hand, figures large — 17% — for the lower end of the revenue field, probably indicating account managers at the banks and credit unions.

The edge that top advisors hold in deal-based compensation is probably because of their greater utilization of new issues and other types of underwritings. Similarly, they continue to make more use of managed accounts and asset-based products that may be more economical for clients with larger accounts.

Smaller advisors will surely see their share of revenue from asset- and fee-based sources grow in the years ahead, but transactions don’t appear to be on the verge of imminent extinction. While there has been a clear shift from transactions to fees, that trend has been in play for some time now, and it appears to have slowed down. Advisors may be meeting some resistance to fees that clients consider excessive, or it may be that the demand for fee-based accounts has largely been met.

It remains to be seen whether firms will start competing on price to continue the shift to fees, which brings the firms stable, recurring revenue. Transaction revenue tends to be market-sensitive and, therefore, volatile.

Another high-profile industry trend over the past year or so has been the emergence of alternative investments, such as hedge funds, into the retail mainstream. Here too, it appears as if the hype is outstripping the reality. For example, alternative investments represent the smallest asset allocation for advisors of both stripes, at 2% for top advisors and 1% for the rest of the field.

Yet, what does appear to be true is that these products are increasingly mainstream.
Notably, the gap between the allocation of alternative investments by top advisors and the rest of the field is narrow. This fact reinforces the perception that these alternatives are broadly available to all investors through various product structures. They are no longer the preserve of wealthy clients.

The one area in which smaller advisors hold a decided edge is in the use of insurance products. Insurance represents 14% of the top advisors’ books, vs almost 23% for the rest of the field.

So, what has emerged throughout IE’s Report Cards research this year is the commonality building among top advisors, regardless of industry sector — the drive to take ever more market share by grabbing bigger accounts and offering an increasingly broad, independent slate of products. IE